Supreme Court mandates prior RBI consultation for Cooperative Bank board supersession: State of M.P. vs. Sanjay Nagayach (2013)

Case Background

The Board of Directors of the District Cooperative Central Bank Ltd., Panna, was elected on October 16, 2007. The Joint Registrar of Cooperative Societies issued a show-cause notice on March 2, 2009, alleging 19 charges against the board. The board submitted detailed replies on May 6, 2009, and May 16, 2011, clarifying that most charges pertained to the previous committee’s tenure. Despite these replies, the Joint Registrar issued a supersession order on September 30, 2011, without prior consultation with the RBI. This action led to the appointment of an administrator.

Timeline

Course of Proceedings

The Board of Directors challenged the supersession order in the High Court of Madhya Pradesh. A single judge initially directed the parties to use the alternative remedy under Section 78 of the Madhya Pradesh Cooperative Societies Act, 1960. However, a Division Bench of the High Court overturned this, setting aside the supersession order due to non-compliance with the second proviso to Section 53(1) of the Act. The State of M.P. and a private party then appealed to the Supreme Court.

Legal Framework

The core legal issue revolves around Section 53 of the Madhya Pradesh Cooperative Societies Act, 1960. Specifically, the second proviso to Section 53(1) states that “in the case of a Co-operative Bank, the order of supersession shall not be passed without previous consultation with the Reserve Bank.” This provision mandates that before superseding a cooperative bank’s board, the Registrar must consult with the RBI. The third proviso adds that if the RBI does not respond within 30 days, it is presumed to agree with the proposed action.

Section 53(1) of the Act outlines the conditions under which the Registrar can remove a Board of Directors. These conditions include negligence in duty, actions prejudicial to the society’s interests, or violations of the Act. Additionally, Section 53(2) requires that before any supersession order, the board must be given a list of allegations and a reasonable opportunity to respond.

Arguments

Appellants’ Arguments:

• The State of M.P. argued that the High Court should not have interfered with the supersession order since an alternative remedy was available under Section 78 of the Act.
• The State contended that the Joint Registrar had sought the RBI’s views and the RBI’s communications only required informing them of the action taken.
• The appellants also argued that the charges against the Board of Directors were serious, justifying the supersession order.
• Another appellant argued that since the RBI did not respond to the show-cause notice within 30 days, it should be presumed that they agreed to the proposed action.

Respondents’ Arguments:

• The Board of Directors argued that the second proviso to Section 53(1) of the Act requires a meaningful consultation with the RBI, not just forwarding the show-cause notice.
• They contended that the Joint Registrar passed the order two and a half years after the show-cause notice, and most charges related to the previous committee.
• The Board also alleged that the supersession order was due to extraneous considerations and political pressure.

Issues Framed by the Supreme Court

The Supreme Court considered the following key issue:

1. Whether the order of supersession of the Board of Directors of the District Cooperative Central Bank Ltd., Panna, was valid in light of the second proviso to Section 53(1) of the Madhya Pradesh Cooperative Societies Act, 1960, which mandates prior consultation with the Reserve Bank of India.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

The Court also considered the following legal provisions:

• Section 53 of the Madhya Pradesh Cooperative Societies Act, 1960
• Reserve Bank of India Act, 1934
• Banking Regulation Act, 1949
• Banking Law (Application to Cooperative Societies) Act, 1965
• Deposit Insurance and Credit Guarantee Corporation Act, 1961
• National Bank for Agricultural and Rural Development Act, 1981

Judgment

The Supreme Court held that the Joint Registrar’s order of supersession was illegal due to a clear violation of the second proviso to Section 53(1) of the Madhya Pradesh Cooperative Societies Act, 1960. The court emphasized that “previous consultation” with the RBI is a mandatory condition precedent before superseding a cooperative bank’s board. The court found that merely sending a copy of the show-cause notice to the RBI was not sufficient; a meaningful consultation required sharing the board’s reply and the proposed action.

The court quoted the following from the judgment:

“If the words of the Statute are in themselves precise and unambiguous, then no more can be necessary than to expound those words in the natural and ordinary sense.”

“The mere serving a copy of the show-cause-notice on RBI with supporting documents is not what is contemplated under the second proviso to Section 53(1).”

“The legislative intention is clear from the following statutory provisions. The statute has fixed the term of an elected Board of Directors as five years from the date on which first meeting of Board of Directors is held.”

The court directed the reinstatement of the Board of Directors, allowing them to complete their term. The court also imposed costs on the State of Madhya Pradesh and the Joint Registrar for their actions.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the need to protect the democratic process in cooperative societies. The court emphasized that the supersession of an elected board should be an exception, not the rule. The court also highlighted the importance of regulatory oversight by the RBI in the cooperative banking sector. The court’s analysis of the facts showed that the charges were not serious enough to justify the supersession and that the Joint Registrar had acted under extraneous influence.

Key Takeaways

• Prior consultation with the RBI is mandatory before superseding a cooperative bank’s board of directors.
• Meaningful consultation requires sharing all relevant documents and the proposed action with the RBI.
• Supersession of an elected board should be an exception, not the rule, and should only be done in exceptional circumstances.
• Elected boards should not be penalized for the shortcomings of previous committees.
• Registrars must act independently and not under external influence.
• Statutory authorities must follow judicial precedents.

Directions

The Supreme Court directed the following:

• The Joint Registrar, Co-operative Societies, Sagar, must reinstate the Board of Directors to complete the period they were illegally kept out of office.
• The State of Madhya Pradesh must pay Rs. 1,00,000 to the Madhya Pradesh Legal Services Authority as costs.
• The Joint Registrar, Co-operative Societies, Sagar, must pay Rs. 10,000 as costs, to be deducted from his salary and deposited in the Panna DCB.

Development of Law

The ratio decidendi of this case is that prior consultation with the Reserve Bank of India is mandatory before superseding the board of directors of a cooperative bank. This judgment reinforces the importance of regulatory oversight and democratic governance in the cooperative sector. This judgment clarifies the interpretation of the second proviso to Section 53(1) of the Madhya Pradesh Cooperative Societies Act, 1960, and ensures that the power to supersede a board is exercised judiciously and within the bounds of law.

Conclusion

The Supreme Court’s judgment in State of M.P. vs. Sanjay Nagayach underscores the mandatory nature of prior consultation with the RBI before superseding a cooperative bank’s board. This decision reinforces the principles of democratic governance and regulatory oversight in the cooperative sector. The court’s emphasis on meaningful consultation and the protection of elected bodies sets a crucial precedent for future cases.